Boots & Sabers

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1741, 31 Oct 22

Housing Sector Faces Sharp Downturn

Ouch.

U.S. homebuilders were a major beneficiary of the Covid economy. Record low interest rates, combined with surging demand from consumers looking for more living space, caused a run on housing unlike most had ever seen before. Home prices surged over 40% in just two years, and homebuilders couldn’t meet the orders fast enough. They even slowed sales just to keep pace. All of that is over.

 

Housing starts for single-family homes dropped nearly 19% year over year in September, according to the U.S. Census. Building permits, which are an indicator of future construction, fell 17%. PulteGroup, one of the nation’s largest homebuilders, reported its cancelation rate jumped from 15% in the second quarter of this year to 24% in the third.

 

The public homebuilders that have reported earnings so far showed surprisingly strong results, but that is because much of it is based on a backlog of homes that went under contract last spring. That was before mortgage rates crossed 6% and then 7%.

 

Now builders are preparing for what’s coming next. Myers said that his company’s balance sheet is incredibly strong right now, thanks to a backlog of homes sold at high prices, but he predicted that the market will be “ugly” by the start of next year.

“It is definitely a hard landing for housing,” he said. “Any hope of a soft landing really evaporated last spring, when it became so clear that our customers who are accustomed to such low mortgage rates just were going to go on strike.”

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1741, 31 October 2022

28 Comments

  1. jonnyv

    There is good and bad in the housing market. Housing prices are falling very quickly in some areas, possibly opening up for some borrowers. The issue that is going to be a problem is that so many people locked in at 3% that they may be unwilling to trade up if they have to take 7.5%.

    But historically, 7.5% isn’t that bad. It just has been very low for the past 20 years. My parents and grandparents’ loans were just shy of double digits.

    What we need to start focusing in on is building more small houses in suburbs. 1200ft square homes. Unfortunately, almost every new development has been 2500 sq feet on a half an acre. The more of these smaller homes that we have the more likely younger couples will be able to afford to purchase and eventually work their way up. But, I assume that the profit margin isn’t there for those homes for builders.

  2. dad29

    Housing prices are falling very quickly in some areas, possibly opening up for some borrowers. The issue that is going to be a problem is that so many people locked in at 3% that they may be unwilling to trade up if they have to take 7.5%.

    The rate has nothing at all to do with ‘what buyers will step up to.’ Homes–for most buyers–are “payment purchases.” If the payment is over $X/month, there is no sale. The interest rate may be 30%–but if the payment is where Joe and Suzy want it, the deal is done.

    historically, 7.5% isn’t that bad.

    So what?

    What we need to start focusing in on is building more small houses in suburbs. 1200ft square homes

    That is VERY small for a family with 2 kids. Perhaps you should start such a development in Bayside, which is an aging ‘burb in need of fresh, young families.

    See how far you get before the Bayside planning commission. My bet? Less than 5 minutes of their time. That’s to tell you that it is NOT ‘profit’; it’s the neighbors.

    You DO know something about business, don’t you?

  3. jonnyv

    Dad29. 1200 feet isn’t VERY small. I grew up in a 1400 square foot house in Appleton. Our house of 15 years that we left last year on the south side was 1250 square feet (minus the small finished basement that didn’t count when we bought, but did when we sold 15 years later). It was a 3 bedroom 1.5 bathroom house. I have 2 kids and they each had their own room. We were on .25 acre lot.

    If you think that 1200 square feet is small, you have a perspective issue. And those houses are generally great starter homes. Not for people with 2 kids. My coworker just bought a 650 square foot house, and he is 22 and single.

    Bayside is actually starting to slowly turn over to a younger crowd. Specifically the area by the Middle school. There are a lot of younger families with kids now. 2 houses sold within a block of me in the last month. One for 230K the other for 550K. Haven’t seen the people moving in yet. The 230K was a fixer upper. But otherwise Bayside doesn’t have the room for expansion like the burbs does. Instead, they are building smaller condos currently right off the highway to help expand the tax base.

    But you are right, the interest rate doesn’t matter as much if you can get it to $X / month. And that is the issue right now, housing prices are still thru the roof for many young couples. Because the supply was low for so long, and the demand high. Since the 2008 housing bust, builders didn’t build as many homes. And during covid when the demand spiked, they weren’t ready for the demand. Now that is starting to wane. It is really a chicken and egg scenario. If there were more 1200-1800 square foot homes that people could afford, it would push down the market price and get people into homes. That would ALSO help push down rental rates as well. But as I said, that isn’t where the $$$ is for builders.

  4. Merlin

    Have you seen the prices on those existing 1200-1800 sqft homes? Grossly inflated at any mortgage rate. People have been paying well over asking price and forgoing home inspections just to get their bid accepted. Municipalities love the inflated market values on those homes for obvious reasons, but those property taxes are going to be unrealized when the recession fully kicks in and the unemployment numbers jump bigly. Mortgage and tax delinquencies are going to jump right along with those inflation and unemployment numbers.

    The future here has been entirely predictable. Depending upon your number of trips around the sun, you’ve seen this kind of impending bust more than once. Predatory lenders will be blamed for lending to people without the means to ride out a recession. Evil realtors will be blamed for inflated prices. Unscrupulous builders/flippers will be blamed for putting lipstick on pigs. Pretty much everyone will be blamed but the fools who bought way more than they could actually afford.

    Then the cycle will all begin again.

  5. Mar

    I can say that where I live in Arizona, we have under gone a building boom. Our area has undergone a huge building boom in past few years with most of the Californians fleeing the state
    They continue to build subdivisions and other houses. However, the home contractors are sitting on a pretty big inventory, with one company holding about 50 unoccupied homes.
    Sadly, our town is slowly starting to look like California cities, crowded with the same kind of house blocks at a time.
    And some California morons want to bring their liberal California values to town. But they will be laughed out of town.

  6. dad29

    But otherwise Bayside doesn’t have the room for expansion like the burbs does. Instead, they are building smaller condos currently right off the highway to help expand the tax base.

    No, JV. Apartments-by-the-43 aren’t what you specified. So let’s tear down those lakefront mansions, re-divide the acreage, and start building 1200 sf’ers THERE. Plenty of room, and then simply march west with that plan. Get Fox Point and Mequon to join in!!

    As to ‘the burbs’ having lots of room for small-house/small-lots: maybe. PERK tests will probably eliminate 75% of that ‘room to grow.’ But feel free to move into a swamp after that Bayside manse you live in becomes three cottages!

  7. jonnyv

    It must be easy to be you Dad29. You rarely give actual real-world solutions, and instead choose to give outrageous fantasy world answers. One of the things that I do is try to bring actual real world possible solutions. You can keep up the crazy election conspiracies, Paul Pelosi insane takes, probably moon-land denying, insanity. It is what you do best. It really is a shame, you seem like a smart guy who has kinda just lost touch with reality.

    My Bayside “manse” is about 2400 square feet. Still smaller than almost all of the new ‘burbs developments. And I am happy people are buying those cookie cutter boring burbs houses that all look the same without a tree in sight. Everyone should have a chance to get what they want. I only think that we may be better suited to build smaller more affordable homes on land that is available to us now.

  8. dad29

    You are amusing, JV. I’ll say that for you.

    Your “real-world” proposal to jam 1200SF houses into the suburbs has been rejected by countless suburbs since about 1975, if not earlier.

    Do you honestly think that you are the first Lefty to come up with that idea?

    Your contention that the Eeeeeeeeeeeeevil Home Builders will not take on your Unicorn-Farts GlitterBomb project is ludicrous. Home builders can and will make a profit on any home they build.

    But just because you need a lesson in real estate, I’ll help you out. The real-estate DEVELOPER is the one you should be pointing toward. Those guys buy a couple hundred acres from Farmer Brown, plat it out, bring in the roads, sewers, and water, and maybe build the houses, too. (Sometimes a separate entity contractor builds the homes.) But before EEEEEEEEEEEEEEEEEEEEEEEEvil Devoloper/HomeBuilder spends dollar one on Farmer Brown’s property, he goes to the local zoning commission to determine what houses he is allowed to build.

    It’s the municipal zoning commission which determines how many SF a home must have, along with details such as basement (Y/N), garage (Y/N) and (attached?), construction materials (brick, wood), and “row-housing’ design.

    Got that?

    The other problem with your Fantasy World is this: you propose a solution to what YOU call a “problem.” Why does the US have a critical need for 1200SF homes in the suburbs, when there are literally tens of thousands of those homes in the Big City? More important, why do you think that there is a serious demand? (I’ll assume that this “demand” is coming from people who would qualify for a mortgage, of course.)

    See, JV, your entire worldview is cute, but not particularly well-informed.

    Or you could just say it’s amusing.

  9. Mar

    “I only think that we may be better suited to build smaller more affordable homes on land that is available to us now.”
    Please tell me Johnny, are those areas ready for more homes?
    Does the cities have the infrastructure to support it?
    Where I live, they have allowed so many subdivisions and housing being built, but they never upgraded the infrastructure, like roads and water supply.

  10. jonnyv

    Mar, these houses won’t just “pop up”. But it will require any cities to invest in infrastructure.

    And Dad29. I do believe there is a market and demand for more affordable homes. It is one of the most common things I hear from people saying that they are priced out of homes currently. And much of that is due to the size of the homes.

    And suburbs have rejected smaller housing and apartments for years because of a very NIMBY attitude. Heaven forbid there is the possibility of lower income people the chance to move in. Many of those restrictions are rooted in racism dating back to the 70s. You are very hung up on the 1200 sq foot example I gave, when really you should think about them as “starter homes”. Many families would love a chance to have a starter home in a burb. That isn’t MY personal dream, but I am sure that there are families that would love to be able to afford to live out there.

    And again, you are trying to spin some sort of ethics in my comment of home builders / developers (many times the same company) by calling them evil. I never once said that. In general… you lie. I just said there is not as much profit in it. And you are right, as I stated above that sometimes it IS the suburb that is responsible for the zoning restrictions on new home & lot sizes.

  11. dad29

    Many families would love a chance to have a starter home in a burb.

    So what? Many families would like to have affordable 5,000 SF homes in Bayside.

  12. dad29

    I just said there is not as much profit in it.

    Well, sorta kinda: I assume that the profit margin isn’t there for those homes for builders.

    CLEARLY implying that builders SHOULD take less profit–otherwise, why bother with the line in the first place?

    But hold your position!! Clintonesque parsing can be good to you!!

  13. Tuerqas

    >The future here has been entirely predictable. Depending upon your number of trips around the sun, you’ve seen this kind of impending bust more than once. Predatory lenders will be blamed for lending to people without the means to ride out a recession. Evil realtors will be blamed for inflated prices. Unscrupulous builders/flippers will be blamed for putting lipstick on pigs. Pretty much everyone will be blamed but the fools who bought way more than they could actually afford.

    I agree with you on that as hitting the nail on the head, Merlin. However, I do think that JV has a decent point. The market scarcity followed by gross inflation has caused people who may normally be moving into their second homes, to not. So what we have is a surplus of larger homes and a real dearth of affordable homes for the non-professional careers looking for their first house. Regardless (mostly) of where they are built, smaller homes are the greatest demand not being met at present.

    That also fits into Merlin’s cycle above and some of those ‘fools’ just have no other choice but to move into the home they cannot really afford as it is also all that is on the market. The problem with your solution, JV, is that by the time those smaller homes are built in quantity market forces will correct and then people looking to move up will try, but can’t sell their house because nobody needs a starter. The cycle will continue because there are no long term solutions that continue to work despite the current market. Only the current market signifies at any given time.

    Not to mention that the home builders sitting on the larger unsold homes know they will be sitting on them until the market changes and they don’t want the current owners to lose their market of new home buyers. If they did those people looking to move up in the near future wouldn’t as they could not sell their current home. i.e., it is about profit, the unrealized profit of the new larger homes sitting in their inventory that no one is buying. They would be undercutting themselves by building loads of new starters. But leave it to a liberal to make it about racism and hate…

  14. jonnyv

    Tuerqas. I don’t know if that last dig was directed at me about “racism and hate”. None of which I assigned to any individual. The closest I said was that many of the NIMBY zoning restrictions have their roots based in racism dating back from the 70’s and 80’s (and earlier honestly). This article has a lot of good links if you care to read them. But that wasn’t my main crux of the original discussion. That was more of a Dad29 tangent he brought me along for.
    https://www.whitehouse.gov/cea/written-materials/2021/06/17/exclusionary-zoning-its-effect-on-racial-discrimination-in-the-housing-market/

    We do need more starter homes. More in the city, and more in the burbs. And as you stated, it isn’t easy for anyone to get that started. And you also agree with me that it isn’t in the builders/developers business interests to actually BUILD those starter homes. Exactly as I was saying. Building 2 smaller homes on smaller plots of land is more work and less profitable than building one larger home on a huge plot of land. And I don’t blame any company for making the best business decision for them.

    Its funny that Dad29 parses my words and then puts his own moral judgements against them and THEN tells me about how I parse the words he has incorrectly interpreted. Does everyone else picture him as some crotchety old, retired man with white socks pulled up to his knees just constantly posting on his own blog all the time and ranting? Cause that is all I can imagine.

  15. dad29

    Let’s try “Science”!!!

    There are 399 single-family homes in Milwaukee selling for less than $180K. There are 434 same price range in Milwaukee County–which means 35 in close suburbs to MKE.

    Homes between $250K-$450K? 124 in Milwaukee, 59 in Tosa, another 52 in Waukesha.

    There are SEVEN HUNDRED NINETY FIVE homes selling for less than $250K in the 20 miles surrounding Big Bend. Some of those are in MKE itself, but not many.

    What “shortage”?

  16. jonnyv

    Dad29. I just went to Zillow and used their nice little drawing map. I circled everything in the South & West of the highways outside of 94. Then put under 250K
    4 in Waukesha
    1 in New Berlin
    2 in Muskego
    About 10 in the Hales Corners/Greendale area.

    35 TOTAL in the Southwest burbs total outside the highway belt. From Johnson Creek east & North of Burlington. And that number drops to 17 if you lower your threshold down to 200K. You can add about another dozen IF you included Cudahy to Oak Creek into that search.

    Now we have to take these numbers with a grain of salt. Because we have already hit the slow period in WI home sales. Most don’t list their homes after October and before Feb. So, this is some of the deadest part of real estate season. This sampling would be better done in April honestly.

    The SW corner of the “Greater Milwaukee Area” is the least expensive to live in when looking at the burbs. You tend to get more bang for your buck than the northern half with Mequon, Germantown, Cedarburg, etc.

    All this does is further affirm my theory that there are less options for cheaper housing in the burbs for lower to middle class families.

    But, honestly I am kinda done discussing this with you. Enjoy yelling at the clouds some more Grampa Simpson.

  17. Mar

    Maybe I am too old, but is $180,000 for a home a starter home, especially in this current horrible economy?

  18. jonnyv

    Mar. Yes. 180K is probably actually LOW for a starter home right now. Depending on what you are looking for. If you figure about 1500 sq feet and a .25 acre lot. In the city those will go from 150-230K. Outside the city, you can expect to pay 250K for a decent place that doesn’t require a lot of work. At least in the area I was discussing, SW of the city.

    I would personally love it if housing prices dropped. I think they were a little inflated last year. But, I can’t say that it didn’t help me sell my starter home.

  19. Mar

    Well, Johnny, we live in different worlds.
    I live in northwest Arizona and and a $180,000 could but you a decent size cookie cutter house.
    But a starter home here would be less than $100,000. And closer to $50,000 as a starter home.
    You could get 5 acres of land in the desert for about $10,000. Though, with our cool summer and cold fall, I’m not sure we live in a desert anymore.

  20. Mar

    And for whats it worth, those $180,000 houses pay less than $800 in property taxes.

  21. dad29

    You use whatever you want, JV. I used the MLS page. No doubt Zillow is far more accurate. /sarc.

  22. Mar

    Please tell me, Johnny, why would you vote for Mandela Barnes,?
    I would be very interested in your answer.

  23. Merlin

    C’mon, Mar!

    They voted for a dementia patient for President. A marxist deadbeat for Senator brings a whole new level of hopium.

  24. jonnyv

    Mar, honestly I haven’t been excited for a D candidate since Obama & Russ F. There have been ones that were ok, but nothing I have been able to vote for here in WI. For me, a vote for Barnes is more so a vote against Ron Johnson. Not only did RJ lie about his “2 terms only” bull crap. But we all saw THAT coming years ago. I don’t like his stance on Social Security, making it discretionary spending. I don’t believe him when he said he didn’t know what his aide was doing with the false elector votes. I have never liked his stance on social issues like abortion. I don’t like that he (and most politicians) have continued to drive up the deficit. He had an actual opportunity to do something about it, but voted to drive us 1.5 trillion more in debt during the Trump administration.

    Much like Ron Johnson, I think that Barnes will be a rubber stamp for the D party. And while I don’t agree with everything the D party does or even stands for. I am closer to their side than I am the R side. I used to say that voting AGAINST someone rarely worked. Until Trump got elected cause people hated Hilary, and then Biden got elected cause Trump was a loudmouth and scared people.

    Do you know how Rs could get my vote?
    Support an abortion ban after 15 or so weeks.
    Actually look to cut the HUGE military budget by a few percent, and other spending.
    Support Net Neutrality.
    Come up with a REAL healthcare plan of some sort. Actually lay it out on paper for everyone to read.
    Stop trying to police free speech on social platforms. (Both sides need to do this) Leave it up to the platforms themselves to moderate. Protect the first amendment.

    Maybe if an R supported 2 of those things and campaigned on them, I would lean towards that candidate. Assuming they don’t have a deal breaker of some sort, but let’s assume they don’t.

  25. dad29

    Does everyone else picture him as some crotchety old, retired man with white socks pulled up to his knees just constantly posting on his own blog all the time and ranting?

    Actually, i typically work about 30-35 hours/week.

    Sadly, unlike YOU, I am not able to take advantage of the RoJo LLC tax break. Please enjoy it on my behalf!!

    But I do wear white socks because the work environment requires it.

  26. dad29

    I don’t like his stance on Social Security, making it discretionary spending

    Because mandated spend is the BEST spend, JV? If you run your business by giving up on balancing income/outflow, short your business.

    RoJo has a problem with articulating his position clearly. Medicare/Medicaid’s annual deficit is north of $1.6 TRILLION. You may recognize that figure; it approximates the entire Federal deficit.

    Sure, the pentagon can be cut. But if someone doesn’t manage CMS (Med/Med) you do not want to imagine the consequences.

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